Mendocino County sues banks over investments

The County of Mendocino on Wednesday filed a lawsuit in federal court against the banks that set the benchmark interest rate known as the London Interbank Offered Rate, claiming financial damages from the manipulation of the interest rates on their investments.

Mendocino County' s treasurer takes funds in an investment pool from the county's general fund and other local public entities and invests it, and the interest rate is an important factor in that decision, according to Mendocino County Counsel Tom Parker. He said it's estimated that the county has lost up to $800,000 in investment returns between 2007 and 2012.

"That's $800,000 the county and other public entities might have made, and might have used to do more in their budgets," Parker said.

The lawsuit was filed in the Northern District court in San Francisco by Crotchett, Pitre & McCarthy, LLP against more than 20 current and former financial institutions that used LIBOR, including Barclays, UBS, Bank of America, JP Morgan and Citigroup, according to a statement Parker released Wednesday.

"Manipulation of the LIBOR, if proven, constitutes an outrageous violation of the public trust by large national and multinational banks," Board of Supervisors chairman 5th District Supervisor Dan Hamburg said in the statement. "This suit promises to bring justice in the form of financial compensation to public agencies like Mendocino County which have suffered losses as the result of illegal banking practices."

LIBOR is the world's benchmark interest rate used for setting short-term interest rates on a wide range of financial instruments, from simple car loans to complex municipal derivative investments used by public entities, according to the county's statement. LIBOR-based investments are in the trillions of dollars every year.

The rate is set each day by the British Bankers' Association, based on an average of the interest rates at which each LIBOR member bank reports it could borrow from other member banks. LIBOR was accepted by the global financial system as the true cost of borrowing between financial institutions because it was believed to represent the true interest rate at which borrowers are able to borrow money, according to the county.

Member banks have been investigated for manipulating LIBOR upward to increase their own profits and downward to report suppressed borrowing rates to create the illusion of financial strength, the county stated. The result is that many public agencies -- the county of Mendocino included -- got lower returns on their investments, according to the county's statement.

"When everybody in the game is giving false numbers because they want their books to look good, the system is corrupted," Parker said.

The county joins other public entities in the lawsuit, including the University of California Regents, the counties of Sonoma, Sacramento, San Mateo and San Diego, and the cities of Richmond and Riverside, along with the East Bay Municipal Utility district and the San Diego Association of Governments.

Parker said it's likely that the federal court will consolidate the separate lawsuits filed by the county and other entities into one case. The banks have 30 days to reply to the lawsuit, and Parker estimated it will be three to four weeks before a court date is set.